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Consider now firm 1's first-stage decision. Suppose firm 1, at the first stage of the game, chooses its investment K, to deter the entry of
Consider now firm 1's first-stage decision. Suppose firm 1, at the first stage of the game, chooses its investment K, to deter the entry of firm 2. Firm 2's profit can be written as = p(q(K), q2(K))q(K) c(q2(K)). Taking the total derivative of firm 2's profit with respect to K leads to ' dk (K) 1 dk + 2 dq(K) aqz dk (K) Q1) Determine the sign of the term aqz dk1 - A) The term is equal to zero. B) The term is positive. C) The term is negative. Q2) Determine the sign of the strategic effect - A) The term is equal to zero. B) The term is positive. da(K) 1 dk C) The term is negative. (1) Instead, suppose firm 1 chooses its investment K at the first stage of the game to accommodate entry. As such, K is chosen to maximize firm 1's profit, which can be written as = p(q(K), q2 (K))q(K) (q(K), K). (K) J Taking the total derivative of firm 1's profit with respect to K leads to (K) Q3) Determine the sign of the strategic effect aq dk + + dk aq dk q dk A) The term is equal to zero. - B) The term is positive. C) The term is negative
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